8/26. The U.S.
Court of Appeals (3rdCir) issued its
opinion [23
pages in PDF] in Video
Pipeline v. Buena Vista Home Entertainment, affirming the
District Court's preliminary injunction of Video Pipeline's online distribution of
short clip reviews of Disney movies, and rejecting Video Pipeline's affirmative
defenses of fair use and copyright misuse. However, while the Appeals Court
ultimately held that the copyright misuse defense fails in this case, it made
new law by recognizing the defense of misuse, and by extending its
applicability.

The dispute in the case involves Video Pipeline's internet publication of
approximately two minute long "clip reviews" of Disney movies, made by Video
Pipeline. These clip reviews are different from the approximately two minute
long "movie trailers", made by Disney, and published in Disney web sites, and
licensed to other web site operators.

The defense of copyright misuse was raised in this case because Disney
licensed its movie trailers subject to license terms that prohibit the licensees
from using the movie trailers in a way that is "derogatory to or critical of the
entertainment industry or of" Disney. That is, Disney uses the exclusive rights
conferred upon it by the Copyright Act, not only to obtain a return for its
creative efforts (which is consistent with the purposes of copyright
protection), but also to suppress criticism (which is contrary to the purposes
of copyright protection).

This ruling is pregnant with possible applications to copyright in digital
works.

History of the Doctrine of Misuse. The doctrine of misuse was first developed in patent law, which shares a
common purpose with copyright law -- providing an economic incentive for
creativity, and investment in creative activity, by extending to authors and
inventors the
right to obtain monopoly rents, for a limited time, on the sale or use their
creative works or inventions.

The Supreme Court held that there is a defense of patent misuse to prevent
the holders of patents from using the authority extended to them under the
Patent Act to prevent competition in products that are not protected by patent.
See,
Morton Salt Co. v. Suppiger Co., 314 U.S. 488 (1942).

Similarly, in
Brulotte v. Thys Co., 379 U.S. 29 (1964), the Supreme Court held that a
patent holder's attempt to collect royalties beyond the term of the patent
constitutes misuse of the patent

In Lasercomb the Court found copyright misuse where the holder of a
copyright in computer software used a license agreement that barred licensees
from using ideas contained in its software to write their own software. In
Alcatel the Court found copyright misuse where the holder of a copyright in
software licensed its use on the condition that the licensee also use it only in
conjunction with the copyright holder's hardware. The DSC case involved
development of a competing microprocessor card.

While these cases have extended the doctrine of misuse to copyright, and have
applied it in the context of computer software and hardware, these cases still
basically apply a variety of competition analysis to find misuse.

What is new in Video Pipeline case (other than that the 3rd Circuit
had not previously recognized the defense of copyright misuse) is that the
analysis is not based on any variety of competition or antitrust analysis.
Specifically, it is based on suppression of criticism. But more generally, it is
based on the notion that copyrights should not be enforceable where the
enforcement undermines the Constitutional purpose of copyright protection -- "to
promote the Progress of Science and useful Arts".

Holding in Video Pipeline. The Court noted that misuse "exists where
the patent or copyright holder has
engaged in some form of anti-competitive behavior." But, it went on to state
that "More on point, however, is the underlying policy rationale for the misuse
doctrine set out in the Constitution's Copyright and Patent Clause ... Put
simply, our Constitution emphasizes the purpose and value of copyrights and
patents. Harm caused by their misuse undermines their usefulness."

The Court reasoned that the underlying
Constitutional purpose can be undermined, not only by anticompetitive licensing
terms, but also by attempts to restrict criticism.

With respect to competition, the Court wrote that "Anti-competitive licensing
agreements may conflict with the purpose behind a copyright’s protection by
depriving the public of the would-be competitor’s creativity."

With respect to suppression of criticism, the Court wrote that "A
copyright holder's attempt to restrict
expression that is critical of it (or of its copyrighted good, or the industry
in which it operates, etc.)
may, in context, subvert -- as do anti-competitive restrictions -- a copyright's
policy goal to encourage the creation and dissemination to the public of
creative activity."

The Court also made some other significant statements about the defense of
misuse. It wrote that "Misuse is not cause to invalidate the copyright or
patent, but instead ``precludes its enforcement during the period of misuse.´´"
(Citing Practice Management.) Moreover, the Court wrote that "To defend on
misuse grounds, the alleged
infringer need not be subject to the purported misuse."

However, having made these broad statements about copyright misuse, the Court
nevertheless held that the defense is inapplicable in this case. For example, it
wrote that "There is no evidence that the
public will find it any more difficult to obtain criticism of Disney and its
interests, or even that the public is considerably less likely to come across
this criticism, if it is not displayed on the same site as the trailers."

And hence, it held that "while we
extend the patent misuse doctrine to copyright, and recognize that it might
operate beyond its traditional anti-competition context, we hold it inapplicable
here. On this record Disney's licensing agreements do not interfere
significantly with copyright policy ..."

Holding in Ty v. Publications International. There is another another
recent case on point -- another Posner opinion. The discussion of copyright
misuse in this case is all dicta, but it contains some original analysis of misuse.

In this case, Judge Posner offered a lengthy analysis of the
purposes and economics of copyright protection. And in doing so, he hinted that copyright misuse
might endanger copyrights. However, he did not decide this case based on this
issue.

The U.S.
Court of Appeals (7thCir) issued its
opinion
in Ty v. Publications International on May 30, 2002. There was
a petition for writ of certiorari, on other grounds, to the Supreme Court, which was
denied. The Appeals Court merely overturned a summary judgment in which the
District Court had rejected a fair use defense, and remanded to the District
Court with further guidance, and instructions that the issue of fair use go to a
jury.

The plaintiff in the District Court is Ty Inc.,
the manufacturer of Beanie Babies.
These are toys made by putting bean pellets inside of bags, that are designed to
resemble animals. Ty holds
copyrights to these as "sculptural works". Publications International, Ltd. (PIL)
publishes books, including
For
the Love of Beanie Babies and Beanie
Babies Collector's Guide, which contain pictures of Beanie Babies, and text.
That is, PIL took and published pictures (derivative works) of Ty's Beanie
Babies (copyrighted works). However, these pictures were part of a guide to
Beanie Babies marketed to collectors. Hence, PIL asserts that use of the
pictures constitutes fair use. Ty differs. Unlike some other Beanie Baby book publishers, PIL has no license from Ty.

Ty filed a complaint in
U.S. District Court (NDIll) against
PIL alleging copyright and trademark
infringement. PIL conceded that the Beanie Babies are copyrighted, and that its
books are derivative works, but asserted the affirmative defense of fair use.
The District Court ruled on summary judgment that the copying was not fair use,
and granted Ty an injunction on the copyright claim. The Appeals Court reversed
and remanded.

Judge Posner also hinted at misuse arising out of copyright
licensing practices and litigation strategies intended to suppress critical
reviews of its products -- a purpose that is contrary to the underlying purposes
of copyright protection.

This is the gyst of his argument. Ty makes a product for kids. It sets
production levels and low prices at levels that do not result in a clearing of
the market. Hence, there is excess demand at Ty's
price and quantity of production. This, among other things, creates a secondary
market for the product.
This secondary market, in turn, creates advertising for the product, and increases
future demand.

However, for there to be an effective secondary market, there must be
literature on the product, including collectors' guides. Posner then reasoned:
"Granted, there is some question how, if Beanie Babies collectors' guides are
indeed a complement to Beanie Babies (and they are), and Ty has a monopoly of
Beanie Babies (and it does), Ty can get a second monopoly profit by taking over
the guides market. The higher the price it charges for guides, the lower will be
the demand for such guides and hence for collecting Beanie Babies and so the
less effective will Ty's strategy of marketing Beanie Babies as collectibles be.
This is the sort of question that has engendered skepticism among economists
about the antitrust rule against tie-in agreements. But there is an answer here:
Ty wants to suppress criticism of its product in these guides."

Posner also wrote that "ownership of a copyright does not confer a legal
right to control public evaluation of the copyrighted work."

He also noted that "Some of the text" in PIL's guide "is
quite critical, for example accusing Ty of frequent trademark
infringements. Ty doesn't like criticism, and so the copyright licenses that it
grants to those publishers whom it is willing to allow to publish Beanie Baby
collectors' guides reserve to it the right to veto any text in the publishers'
guides. It also forbids its licensees to reveal that they are licensees of Ty. Its
standard licensing agreement requires the licensee to print on the title
page and back cover of its publication the following misleading statement:
``This publication is not sponsored or endorsed by, or otherwise affiliated with Ty
Inc. All Copyrights and Trademarks of Ty Inc. are used by permission. All rights
reserved.´´"

However, he left it at that. He wrapped up this line of analysis with the
statement, "We need not consider whether such a misleading statement might constitute
copyright misuse, endangering Ty's copyrights."

Thus, like Judge Ambro in Video Products, Judge Posner in Ty is
taking the doctrine of copyright misuse away from its roots in competition law,
and grounding it in the notion that the use of copyright protection for purposes
that are contrary to the underlying purposes of the Constitutional mandate, such
as suppressing criticism, is misuse.

Other Possible Applications of the Copyright Misuse. In addition to
the situations in the Video Product and Ty cases, one could conceive of other
areas where the rationale of Video Pipeline might be applied.

One is the online publication of unpublished records of companies,
organizations and political figures. Employees, shareholders, and other
potential critics of companies, organizations, and public and political figures
sometimes obtain copies of documents from their employers, companies or others,
and publish them in web sites.

Recently, plaintiffs have had considerable success in enjoining the
publication of such documents under copyright law. That is, they assert
copyright in works, which they have not published, and they have no intention of
publishing. In this situation there is no lost revenue or profits to the
copyright holder. Moreover, in cases of public concern, the effect of an
injunction is to decrease criticism and public discourse on matters of public
interest. That is, the underlying purpose of copyright protection is not
furthered by some such injunctions; it is undermined.

A second area where the doctrine of copyright misuse, as described in
Video Pipeline, might be applied, is assertion of the Digital Millennium
Copright Act (DMCA) to obtain quasi patent rights. That is, traditionally a
copyright owner's main remedy has been for violation of his exclusive rights of
copyright, as provided in
17 U.S.C. § 106 --
that is, an action for infringement.

Now, the DMCA, at
17 U.S.C. § 1201, provides, for example, that "No person shall circumvent a
technological measure that effectively controls access to a work protected under
this title." It further provides at § 1201(a)(2) that "No person shall
manufacture, import, offer to the public, provide, or otherwise traffic in any
technology, product, service, device, component, or part thereof, that (A) is
primarily designed or produced for the purpose of circumventing a technological
measure that effectively controls access to a work protected under this title;
(B) has only limited commercially significant purpose or use other than to
circumvent a technological measure that effectively controls access to a work
protected under this title; or (C) is marketed by that person or another acting
in concert with that person with that person's knowledge for use in
circumventing a technological measure that effectively controls access to a work
protected under this title."

This provides the copyright holder with a remedy for circumventing copy
protection technology. That is, the copyright holder (who may have invented nothing)
could sue an equipment manufacturer or software developer (who may hold patents)
seeking an injunction under the anti-circumvention provisions of the DMCA.
However, the right to sue is also a right not to sue, or to negotiate terms
under which one will forebear from bringing suit. Hence, by leveraging the DMCA,
a copyright holder might exclude someone from using an invention, obtain
payments for its use, or impose terms on the maker of the invention. But, the
copyright holder invented nothing. The patent holder did. Yet, a skillful
leveraging of the DMCA might have the effect of transferring the capture of some
of the monopoly rents of the patent from the patent inventor to the copyright
holder. And this, arguably, may subvert the underlying purpose of the patent and
copyright clause of the Constitution.

And of course, if the copyright holder leverages the DMCA to impose anti
competitive licensing terms on the patent holder, then this too, arguably could
subvert the underlying purpose of copyright law, and constitute copyright
misuse.

A third area where one might seek to apply the holding of Video Pipeline
is the use of the DMCA to prevent circumvention of technological measures that
control access to copyrighted works, where the copyrighted works are employed to
prevent interoperability of equipment, and the copyright holder is seeking to
protect its revenues from the sale of its interoperable equipment, rather than
protect is revenue from the sale of the copyrighted software.

In this scenario, the copyrighted work would be a short software program,
that prevents replacement parts and supplies that are not manufactured by the
copyright holder from interoperating with the equipment in which the software
program is embedded.

Yet another area might be assertion of the anti-circumvention provisions of
the DMCA against persons who have circumvented technological measures that
control access to copyrighted works solely to excerpt short portions for the
purpose of commentary and criticism.

3rd Circuit Addresses Fair Use and Copyright
Misuse

8/26. The U.S.
Court of Appeals (3rdCir) issued its
opinion [23
pages in PDF] in Video
Pipeline v. Buena Vista Home Entertainment, a
copyright case involving the affirmative defenses of fair use and copyright
misuse. Video Pipeline published in a website a collection of two minute long
clip previews of copyrighted movies, without authorization. The District Court
rejected Video Pipleline's arguments that it is protected by the doctrines of
fair use and copyright misuse, and granted a preliminary injunction. The Appeals
Court affirmed.

The Appeals Court's application of the four prong fair use analysis of
17
U.S.C. § 107 is noteworthy, and constitutes the bulk
of the Appeals Court's analysis. However, the case is particularly significant
because the Appeals Court also recognized the defense of copyright misuse,
recognized that it might apply in
situations beyond the traditional anti-competitive context, and recognized that
licensing terms that prohibit criticism may serve as the basis of a copyright
misuse defense. However, the Court held that on the facts of this case, the
defense of copyright misuse fails.

Copyright misuse is potentially an emerging area of copyright law, and one that
could find application in a variety of digital copyright situations. See,
related story, titled "3rd Circuit Breaks New Ground on Copyright
Misuse".

Background. The Appeals Court opinion distinguishes between "movie
trailers", which are approximately two minutes long pieces, composed by the movie
studios, and used to market movies, from "clip previews", which are also
about two minute pieces, but are composed with segments from the full movie by
Video Pipeline, and which do not seek to market the movies.

Video Pipeline first displayed movie trailers, under license
from Disney, on its website. It later composed and displayed clip previews,
without license. It charges for its streaming clip reviews.

Buena Vista Home Entertainment (which is a party to this case)
holds an exclusive license to distribute Miramax (another party) and Walt Disney
Pictures and Television (not a party) home videos. Buena Vista, Miramax, and
Walt Disney Pictures and Television are subsidiaries of The Walt Disney Co. (not
a party). Nevertheless, the Appeals Court refers to Buena Vista and Miramax as
"Disney".

Disney also makes its movie trailers available on the internet.
It displays them on its own web sites in order to attract and to keep users
there and then takes advantage of the users' presence to advertise and sell
other products. It also licenses them to others.

Disney's license agreement with some other entities includes the
following language, as recited in the Appeals Court opinion: "The Website in
which the Trailers are used may not be derogatory to or critical of the
entertainment industry or of [Disney] (and its officers, directors, agents,
employees, affiliates, divisions and subsidiaries) or of any motion picture
produced or distributed by [Disney] ... [or] of the materials from which the
Trailers were taken or of any person involved with the production of the
Underlying Works. Any breach of this paragraph will render this license null and
void and Licensee will be liable to all parties concerned for defamation and
copyright infringement, as well as breach of contract."

District Court. Video Pipeline
began the litigation. It filed a complaint in the
U.S. District Court (NJ)
seeking a declaratory judgment that its online use of the clip previews does not
violate federal copyright law. Disney counterclaimed for copyright infringement.
The District Court entered a preliminary injunction prohibiting Video Pipeline
from displaying clip previews of Disney films on the internet. (See, opinion
published at 192 F. Supp. 2d 321.) Video Pipeline then brought this
interlocutory appeal.

Appeals Court Holding on Fair Use. The Appeals Court addressed the
four factors of Section 107 in order.

The Court held that the first factor ("the purpose and character of the use,
including whether such use is of a commercial nature or is for nonprofit
educational purposes") weighs in favor of Disney. The Court found that since
Video Pipleline charges for streaming videos, its purpose is commercial. However,
it added that this finding is not necessarily dispositive on this factor. It
also considered whether the clip reviews were "transformative". It concluded
that they were not. They were copied verbatim from the original movies.
Moreover, the clip reviews share the same purpose and character of the movie
trailers made by Disney.

The Court held that the second factor ("the nature of the copyrighted work")
weighs in favor of Disney. It wrote that fair use is more difficult to establish
when the works are "creative, non-factual expression", such as with Disney movies.

The Court held that the third factor ("the amount and substantiality of the
portion used in relation to the copyrighted work as a whole") weighs in favor of
Video Pipeline because it copied only about two minutes out of each hour and a
half to two hour movie.

The Court held that the fourth factor ("the effect of the use upon the
potential market for or value of the copyrighted work") weighs in favor of
Disney. The Court wrote that this analysis takes into consideration not only
harm to the market for original works (the movies), but also harm to the market
for derivative works (Disney's movie trailers). And, Video Pipeline's clip
reviews harmed the market for Disney's movie trailers.

So, the Appeals Court concluded that "Three of the four
statutory factors indicate that Video Pipeline’s internet display of the clip
previews will not qualify as a fair use. From our consideration of each of those
factors, we cannot conclude that Video Pipeline's online display of its clip
previews does anything but ``infringe[ ] a work for personal profit.´´ Harper &
Row, 471 U.S. at 563. The District Court therefore correctly held that Video
Pipeline has failed to show that it will likely prevail on its fair use
defense."

This case is Video Pipeline v. Buena Vista Home Entertainment, Inc. and
Miramax Film Corp., No. 02-2497, an appeal from the U.S. District Court for the
District of New Jersey, D.C. No. 00-cv-05236, Judge Jerome Simandle presiding. Judge
Thomas Ambro wrote the unanimous opinion for the three judge panel of the Court of
Appeals.

Wednesday, August 27

The House is in recess until September 3. Senate is in recess until
September 2. The Supreme Court is in recess until October 6. (The Supreme
Court will meet in special session to hear oral arguments in McConnell v. FEC
on September 8.)

Labor Day. The FCC, USITC and other federal government agencies will be closed.
The National Press Club will be closed.

Tuesday, September 2

9:30 AM. The Senate will return from its August recess. The Senate will
begin consideration of
HR 2660,
the Labor/HHS and Education Appropriations bill.

The Treasury Department's and the
Internal Revenue Service's (IRS) will hold a
public meeting regarding their notice of proposed rulemaking (NPRM)
regarding regulations that "affect certain taxpayers who participate in the
transfer of stock pursuant to the exercise of incentive stock options and the
exercise of options granted pursuant to an employee stock purchase plan
(statutory options)." See,
notice in the Federal Register, June 9, 2003, Vol. 68, No. 110, at Pages 34344 - 34370.

Wednesday, September 3

2:00 PM. The House will return from its August recess. Votes will be
postponed until 6:30 PM.

POSTPONED.1:00 PM. The House Commerce
Committee's Subcommittee on Telecommunications and the Internet will
hold a hearing titled "Digital Dividends and Other Proposals to
Leverage Investment in Technology". The hearing will be webcast. See,
notice.
Location: Room 2123, Rayburn Building.

Deadline to submit reply comments to the Federal
Communications Commission (FCC) in response to its
Notice of Inquiry [21 pages in PDF] in its proceeding titled "In the Matter
of Inquiry Regarding Carrier Current
Systems, including Broadband over Power Line Systems". See,
notice in the Federal Register, May 23, 2003, Vol. 68, No. 100, at Pages 28182 - 28186.
See also, story titled "FCC Announces NOI Regarding Broadband Over Powerlines"
in TLJ Daily E-Mail Alert No. 628, April 24, 2003, and story titled "FCC
Releases NOI on Broadband Over Power Lines" in TLJ Daily E-Mail Alert No. 656,
May 7, 2003.This is ET Docket No. 03-104. For more information, contact Anh Wride at
202 418-0577 or anh.wride@fcc.gov.

12:00 NOON. Deadline to submit requests to testify orally at the September
18, 2003 hearing of the U.S. Trade
Representative's (USTR) interagency Trade Policy Staff Committee (TPSC) to
assist it in preparing its annual report to the Congress on the People's
Republic of China's compliance with the commitments that it made in connection
with its accession to the World Trade
Organization (WTO). See,
notice in the Federal Register, July 21, 2003, Vol. 68, No. 139, at Pages
43247 - 43248.

Breeden Releases Report on Restoring Trust
at MCI WorldCom

8/26. Richard
Breeden, the Corporate Monitor in the MCI WorldCom bankruptcy proceeding,
released his
report [156 pages in PDF] to the
U.S. District Court (SDNY) on corporate governance.

The report is titled
"Restoring Trust: Report to The Hon. Jed S. Rakoff The United States District
Court For the Southern District of New York On Corporate Governance For The
Future of MCI, Inc."

Breeden
begins with the observation that "As CEO, Ebbers was allowed nearly imperial
reign over the affairs of the Company, without the board of directors exercising
any apparent restraint on his actions, even though he did not appear to possess
the experience or training to be remotely qualified for his position. One cannot
say that the checks and balances against excessive power within the old WorldCom
didn’t work adequately. Rather, the sad fact is that there were no checks and
balances."

The report contains 78 recommendations pertaining to
"selection of directors, qualification, conflicts
and independence standards for board members, the functioning of the board and
its committees, establishment of the position of non-executive chairman,
specific limits on compensation practices, equity compensation programs,
accounting and disclosure issues, ethics and legal compliance programs and other
areas."

More News

8/26. Computer Associates International
announced in a
release "plans to settle all outstanding litigation related to claims about
past accounting issues. Included are shareholder and ERISA class-action suits
and related derivative litigation. As part of the settlement, CA plans to issue
to the shareholder classes up to 5.7 million shares of CA common stock."

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